How Gun Maker Smith & Wesson Almost Went Out Of Business When It Accepted Gun Control

In the wake of the Newtown, Conn., shooting, gun control has been thrust into the spotlight once again. The gun industry — and its lobby group, the NRA — stands firmly against gun control of any kind.

But most people forget that 13 years ago Smith & Wesson tried to do something that, in hindsight, seems radical: reach a compromise with the federal government by accepting some sort of gun control, in return for permission to stay in business, albeit with more strict regulation.

That year, President Bill Clinton proposed legislation that enforced safety and design standards, such as locking devices and restrictions on magazine sizes, and limits on the sales and distribution of firearms. No marketing or advertising restrictions were put in place. Clinton had been working on gun safety for the later part of his term, so this was a huge milestone for his efforts. Current New York Governor Andrew Cuomo was the architect behind the agreement.

Smith & Wesson voluntarily jumped on board.

There is a history of companies doing this type of thing. Most famously, tobacco companies have accepted stringent regulation of their product. Liquor companies make the same regulatory compromises all the time. Both industries are subject to all sort of arcane laws limiting their marketing, advertising, and distribution.

But those regulations always guarantee one thing: The right to stay in business.

So S&W agreed to play along with this agreement and to be accountable for its enforcement by a five-member oversight commission.

Consumers began refusing to buy S&W products and the market became flooded with used S&W goods that people wanted no part of. Gun enthusiasts saw the company as breaking solidarity with them, as a traitor and perpetrator of gun control. Consumers severely punished the firm for its disloyalty.

Needless to say, S&W was taken completely off guard by the response.

The firm experienced an immediate sales decline of nearly 40 percent in the year after its compromise.

Bloomberg Data/Christina Austin BI

Despite the drastic downturn (or perhaps because of it), another company, Saf-T-Hammer, was interested in purchasing the company and putting it back on its feet. The company realized the brand, and its name, were worth salvaging.

In 2001, shortly after the political fiasco, Saf-T-Hammer, purchased the firm for $45 million, with the intent of incorporating its security products onto all S&W goods. The new company was named Smith & Wesson Holding Company.

Fast forward 13 years, and the gun debate is back on the minds of politicians and civilians alike. According to CoreBrand, which conducts research on the familiarity and favorability of 1,000 American corporate brands, S&W is incredibly wary of becoming involved in the political sphere again. CoreBrand worked with the firearms company as it was "coming out of its depression and revitalizing."

"It needs to get over its anguish," says CoreBrand founder Jim Gregory. "It has the opportunity to lead the conversation with other gun manufacturers about proper safety measures. It can help educate about guns, which would definitely be in its best interest."

According to Gregory, the team that facilitated the Clinton agreement on the S&W side is no longer with the company, which at this point can be seen as both a good and bad thing. Good because they made a major mistake, and bad because they can't help the reformed company learn from the mistake and avoid it this time around.

"It can create a long-term strategy instead of being politicized out of existence," said Gregory.

In terms of why S&W went along with the legislation in the first place, Gregory thinks the political pressure may have been hard to deflect, much like how Obama's administration is handling the current gun debate. Gregory says Obama's strong statement against gun violence may create another round of political pressure for these firms.

Basically, gun companies are sitting and waiting to see if Obama will force things upon them or if he expects gun companies to regulate themselves.

Other companies, such as Citgo, because it is owned by Venezuela, and BP, after its oil spills, have experienced customer boycotts, but Gregory says none have been as effective as the boycott against S&W.

"They typically don't last very long and are quite short-lived," said Gregory of the past boycotts against other companies.

Today, Gregory thinks some customers have forgiven and forgotten, while others may still hold personal boycotts against S&W. The firm has gone to great lengths to improve its image, from introducing new products, to inserting itself into public relations through media impressions, supporting shooting competitions, the Olympics, and community activities in general.

Still, Gregory says some people will always see gun producers in a bad light, no matter how much they give back to the community or enforce safety. These people will never be swayed otherwise.

While some will never be convinced of the benefits of guns, others rushed out to purchase more guns after the Connecticut shooting. Whether it's because they felt unsafe without a weapon, or because they feared legislation that would prohibit future sales of firearms, is yet to be understood.

This chart shows how S&W's stock price has grown threefold since early 2011.

Other gun companies have seen great days lately, as well. Hyatt Gun Store, in Charlotte, had a record-breaking day following the Connecticut massacre. The store sold over $1 million in products in one day, the highest single-day profit since the store opened in 1959. Hyatt isn't the only store that experienced this. Walmart gun shelves were cleaned out as well, according to a report by Bloomberg.

This surge in purchases could have contributed to S&W's impressive sales revenue from 2012.

Today, the gun industry is under extreme political duress again as sales continue to spike. History — and the finances — suggest there won't be any compromises this time round.